William U. Chandler and Marc R. Ledbetter with Igor Bashmakov
and Jessica Hamburger

1. Introduction

This paper considers the energy efficiency potential and the
priorities for technology in Eastern Europe, the former Soviet
Union, and China. These regions are interesting because they
produce a combined total of one-third of global energy-related
carbon dioxide emissions, and they are undergoing rapid changes
of energy and economic policy.

Energy efficiency technology transfer is often cited as a high
priority in international development cooperation programmes for
Eastern Europe, the former Soviet Union, and China. This priority
is warranted by the fact that energy efficiency improvements
bring multiple benefits. Efficiency can reduce energy bills for
consumers, reduce the capital required for energy system
development, and reduce pollutants, including the oxides of
carbon, sulphur, and nitrogen. Efficiency, in fact, is perhaps
the clearest example of a sustainable development strategy
because it is the one strategy that contributes to development by
providing higher levels of employment, higher standards of
living, and better working and environmental conditions.

Igor Bashmakov and Jessica Hamburger contributed sections
of this report. William Chandler and Marc Ledbetter are
responsible for the integrated piece, its validity or errors.

The three formerly centrally planned regions rank high in
energy intensity -no matter how economic output is measured. If
we consider rationalization of these economies through
restructuring as well as technological energy efficiency
improvements, the efficiency potential in the regions is large
indeed. Rapid economic and political change in these regions may
thus presage major reductions in energy intensity, though this
improvement will be offset to some extent by increases in energy
used for personal consumption. That trade-off is the subject of a
different paper.

Market restructuring is, of course, the first priority for
rationalizing energy use in these countries. No other measure to
improve the efficiency with which energy is used will have as
large an effect. But market restructuring is not enough.
Experience in market economies tells us that markets leave vast
untapped cost-effective resources of energy efficiency. Strong
non-market measures are often proposed to supplement markets,
including imposing heavy energy taxes and high performance
standards on energy-using equipment. However, it has become
increasingly clear that such measures are not always politically
feasible. Nor are they always appropriate. Therefore, additional
approaches are needed that provide strong incentives to producers
and consumers to improve energy efficiency, including measures
such as market-pull programmes, integrated resources planning,
demand-side management, financing, and partnership between
government, non-governmental organizations (NGOs), and business
to stimulate efficiency investments.

2. Energy efficiency prospects in three key regions
Eastern Europe

The nations of Eastern Europe rank among the least
energy-efficient countries in the world. Per capita energy use in
the former Czechoslovakia, for example, exceeds that of Austria,
yet former Czechoslovakian GNP per capita is only one-third as
high as Austria's (Kostalova et al., 1992). It is this excessive,
uncontrolled energy use that more than anything else causes
severe air, land, and water pollution in the immediate region.
The region, with less than 3 per cent of the world's population,
produces 9 per cent of global energy-related greenhouse gas
emissions - almost as much as China.

Energy inefficiency constrains economic growth. Consider the
case of Poland, which is the world's fourth-largest coal producer
and which meets three-quarters of its domestic energy demand with
coal. Poland in 1985 allocated one-third of its entire annual
industrial capital budget to coal mining alone. Coal production
in Poland before the revolution consumed one-fifth of all steel
used in the country and nearly one-tenth of all electric power.
Coal production is becoming more difficult and expensive year by
year as the resource is being depleted. The average depth of
mines is now 600 metres, and the required depth of new mines is
increasing at a rate of 10-20 metres per year. Reducing the
demand for coal simultaneously frees capital for more productive
uses elsewhere in the economy (Sitnicki et al., 1990).

The nations of Eastern Europe have had varying degrees of
success in reducing their burdens of energy intensity. Poland, as
a result of strict price decontrol measures, cut energy intensity
by 11 per cent between 1988 and 1990, more than any other East
European nation. Energy intensity in the former Soviet Union, in
contrast, has increased (Bashmakov, 1992a; see also Makarov et
al., 1990).

GDP, unfortunately, dropped dramatically in Poland until 1992.
(In 1992 Poland's economy grew at a rate of 5 per cent, faster
than any other in Europe.) However, energy use has fallen faster
than the economy. Consequently, the amount of capital allocated
to energy production has dropped markedly since the economic
reforms began, owing primarily to structural change. The share of
capital allocated to coal is down from almost 40 per cent of
industrial investment to just over 20 per cent. A smaller share
of investment for the energy sector means that Poland's crumbling
infrastructure - poor telephone service, lack of health care
facilities, inadequate public transportation will suffer less
from the misallocation of capital seen for the last 50 years.

Poland has won these gains the hard way in part by imposing an
extremely rapid rate of adjustment to world prices on its
citizens. Its policy represents extraordinary political courage.
Consider the following changes in energy prices in Poland in
1991-1992 (Slawomir Pasierb, executive director, Polish Energy
Efficiency Centre):

- the price of residential natural gas has increased 1,600
per cent;
- the price of residential electricity has increased 1,000
per cent;
- the price of gas to Polish industry has reached US levels.

The price of residential electricity is now at 5 US cents per
kilowatt hour, close to the actual cost and equal to the price
paid by many US residential customers. Yet annual per capita
income in Poland is one-quarter that of the United States. In two
years, Poland has made the transition from highly subsidized
energy to free prices. In comparison, the United States took 10
years to accomplish the same thing.

In Hungary, energy prices have reached world market levels.
The price of gasoline in Hungary, in fact, is twice as high as in
the United States. The economy has also fallen dramatically, in
1991 reaching only 70 per cent of the 1988 level. The Hungarian
economy is lower in energy intensity than those of other East
European nations, however, because it began energy price reform
over a decade ago and uses oil and gas, which are easier to use
efficiently than coal, to a greater extent. The nation imports
about 60 per cent of its total energy supply, primarily oil and
natural gas. Hungary is an export-oriented economy, and thus can
earn the foreign currency now necessary for purchasing oil and
gas (Jaszay, 1990).

The situation has evolved somewhat more slowly elsewhere in
Eastern Europe. The Czech Republic, like Poland, is plagued by
heavy reliance on coal, which, with lignite, supplies over
two-thirds of total energy use. The economy has undergone much
slower market reform than in Poland, and prices remain
controlled. Nevertheless, restructuring is under way, with prices
hundreds of times higher for industrial natural gas and
electricity than in 1989. In 1991, Czech and Slovak GDP was 20
per cent below the 1989 level. Similarly, Bulgaria's economy
dropped by 11 per cent in 1991, and the number of jobs fell by 14
per cent. Inflation reached 72 per cent on an annual basis. Food
now costs about 40 per cent of average household disposable
income (Bulgarian Agency for Economic Coordination and
Development, 1992). And three-fifths of the Bulgarian industrial
sector is operating at less than half of capacity owing to
shortages of energy. The nation recently imported 70 per cent of
its energy from the former Soviet Union (Dempsey, 1992).

Romania remains far behind the rest of Eastern Europe in
economic and energy reform. The nation's economic and political
infrastructure still suffers from the legacy of the Ceausescu
regime. In the electricity sector, power shortages remain common
and the quality of power is so badly degraded that the frequency
drops from the standard 50 Hz to 47.5 Hz. Chronic energy and
power shortages since 1980 resulted in the disconnection of the
power grid from that of the Council for Mutual Economic
Assistance (Comecon). To keep the system operating, the national
dispatcher had to resort frequently to brownouts and blackouts,
with the brunt of shortages borne by domestic consumers and
public lighting even though industry accounted for two-thirds of
power use. Present policy, however, is now oriented more toward
consumers, and the energy deficit is borne by industry. The
present shortage of electric energy supply amounts to 30 gigawatt
hours per day - over 40 per cent of total electric power use
(Gheorghe, 1992).

The energy efficiency potential in Eastern Europe amounts to
1525 per cent of current energy use. With consumption at about 16
exajoules (EJ), this means that up to 4 EJ of savings is
available. The carbon emissions reduction that would be achieved
by capturing this potential would total 80 million tons.

Future energy use in Eastern Europe - or in any post-planned
economy - is exceedingly difficult to project. In general, future
demand will depend on two broad factors: the extent of economic
restructuring and the application of modern energy efficiency
technology. Without restructuring, economic growth is likely to
be anaemic. With restructuring and with energy productivity
improvements, growing incomes are likely to push up consumption
in the residential and transportation sectors, offsetting demand
reductions in the industrial sector. One study suggested that a
combination of economic reform and the introduction of energy
efficiency technology, however, could enable Eastern Europe to
hold energy demand - and carbon emissions - virtually constant
(Kolar and Chandler, 1990). However, much more work is needed to
clarify the future of energy demand in the region.

The former Soviet Union

The former Soviet Union overall consumes three-quarters as
much energy as the United States, yet produces only 30-50 per
cent as much economic value. The economy of that region has
experienced collapse equal to the Great Depression in the United
States in 1929. GDP in the former Soviet republics fell 15 per
cent in 1991 and 10-20 per cent more in 1992 - all the way back
to 1970 levels (Bashmakov, 1992b).1 This crisis translates into
hardship for 90 million persons 30 per cent of all former Soviets
- who now live below the official poverty line.

Unfortunately, the economic crisis has not yet produced energy
efficiency improvements; the energy intensity of the Soviet
economy has in fact increased. This problem is explained by the
fact that the light manufacturing sector has been hit hard by the
reduction in imports, which provided spare parts and other
essential inputs, whereas the energy-intensive heavy materials
sector has not been affected as much.

High energy intensity in the former Soviet Union is not due to
high levels of energy use by consumers, however. Russians live in
small apartments: they enjoy only 15 m² of household space per
capita, compared with 30 and 55 m² for West Europeans and
Americans, respectively. Electric power consumption per capita in
the region is 70 per cent of US levels, but actual direct
consumption by consumers is only 10 per cent that of the average
US citizen.² Similarly in the transportation sector, residents
of the former Soviet Union rely heavily on mass transportation.

High Soviet energy intensity grew primarily out of the skewed
emphasis on heavy industry and energy-intensive materials, as
well as reliance on outdated technology. The buildings sector
also lacks individual heating controls in apartments, and all
sectors lack economic incentives to conserve heat and hot water.
Heavy energy supply investments have become excessive and reduce
economic growth. The total annual investments in oil, natural
gas, and coal production have reached almost 20 per cent of all
investment and 40 per cent of industrial investment.

Restructuring the Soviet economy would have major benefits for
energy conservation. Materials use per capita is very high
compared with other nations, and market reforms would have two
effects. First, less scrap and unnecessary material would be
produced. Secondly, materials would be used more efficiently in
manufacturing, construction, and packaging as manufacturers
compete for price-sensitive markets. Structural reform could save
11 EJ by 2010, or almost one-sixth of current total Soviet energy
demand.

The potential energy savings the former Soviet Union could
achieve by implementing energy efficiency measures is over 15 EJ
(15 quads, or 7.5 million barrels of oil equivalent per day). The
largest savings are available in the energy, industrial, and
agricultural sectors. The investment required to achieve these
potential energy savings is estimated at US$4-6 billion.

Energy consumers would profit substantially from investments
in energy-efficiency improvement projects. Potentially avoided
capital investments total up to 1.8 trillion roubles (mid-1992
values). In addition, atmospheric pollution could be reduced 10
per cent, including a significant decrease in greenhouse
emissions at no additional capital cost.

According to research by Igor Bashmakov, every rouble invested
in the production of energy efficiency equipment produces -
throughout the economy - five times more jobs than a rouble
invested in electricity generation, and seven times more than a
rouble invested in the oil and gas industry. Therefore, 29
billion roubles in investments in energy would create as many
jobs as 175 billion roubles in energy supply (mid-1992 roubles)
(Centre for Energy Efficiency, Moscow, 1992). The difference
between 29 and 175 billion roubles of investments represents 40
per cent of the total capital accumulated in residential
buildings. In other words, energy efficiency measures could free
resources to improve living conditions substantially for the
Russian population. If a share of the investment savings were to
go to production in light and food industries and residential
buildings construction, then simultaneously more jobs would be
created and production of consumer goods would increase,
resulting in a better level of well-being in the former Soviet
Union.

Full implementation of the wide range of energy efficiency
improvements with very low costs could reduce CO2
emissions by 200 million tons of carbon in the former Soviet
Union alone in the year 2005, the equivalent of annual CO2
emissions in France and Italy together. It would be very
difficult to find any other country with so large and so cheap a
carbon conservation potential and with a relatively well-educated
labour force capable of developing and realizing programmes to
capture this potential.

China

China has become the world's third-largest energy consumer,
using 30.4 EJ in 1991. Consumption and domestic production
increased by 5 per cent a year during the 1980s (Wang Qingyi,
1992). As in many developing or planned economies, the industrial
sector dominates consumption. In 1991, China's energy was used in
the following manner:

Energy consumption per unit of GNP (energy intensity) in China
is twice the average level of other developing countries, and
three times that of Western Europe (Zhang Aling, 1992).

Economic reforms begun in 1978 and accelerated since 1990 have
led to tremendous growth in energy use and significant changes in
China's energy management system. The rest of the economy grew
much faster than the energy sector, however, causing energy
demand to outstrip supply, especially in power production. During
the 1980s, 5 per cent annual growth of energy production and
consumption lagged behind explosive economic growth, which
averaged 9 per cent per year over the decade, and reached 14.1
per cent in 1992.

A striking characteristic of China's energy economy is low per
capita consumption. In 1990, commercial energy consumption per
capita in China was only about 25.5 gigajoules (GJ), about 40 per
cent of the world average, and less than one-tenth that of the
United States. Space heating is prohibited or sharply restricted
in large areas of China in order to conserve fuel for industry.

Environmental pollution remains a major problem with and
challenge for China's energy industry. Coal combustion, which
supplies three-quarters of China's energy needs, is the largest
source of emissions. Whereas most countries convert coal to
electricity, many Chinese consumers use coal directly, even for
household cooking and heating. Excessive, inefficient coal use
contributes to a range of global, regional, and local
environmental problems.

China still faces severe energy shortages and severe
energy-related environmental damage. Energy shortages are caused
by a combination of low energy prices, use of inefficient
technologies and management practices, rapid economic growth,
transportation bottlenecks, and emphasis on energy-intensive
industries, such as cement and steel. Insufficient energy supply
prevented enterprises from operating at full capacity and caused
economic losses. In 1988, 25 per cent of industrial enterprises
were operating at low capacity and one-third of the agricultural
sector suffered from severe power shortages, resulting in a 400
billion yuan loss in output value.

China made the following gains in energy efficiency in the
1980s (Shen Longhai and Zhou Changyi, 1992):

 Energy consumption per 10,000 yuan of GNP fell from
392 GJ in 1980 to 273 GJ in 1990. Energy intensity decreased
by 30 per cent over the decade, an annual average rate of 3.5
per cent. The accumulated energy savings were 7.9 EJ.

 The income elasticity of energy demand was 0.56
during the 1980s. That is, almost half of the incremental
growth in the national economy was made possible by energy
conservation. Elasticity was reduced by two-thirds compared
with the previous 25 years.

 Energy efficiency improvements were achieved in
two-thirds of industrial products examined in a government
survey. Examples include the production of coal-fired power,
steel, cement, aluminium, fertilizer, and crude oil
processing.

In addition to price reform and ownership changes, the Chinese
government also initiated policies to promote energy efficiency
directly. Conservation was formally introduced into China's
national economic plan in 1981. Laws and regulations were passed,
and the State Planning Commission (SPC) undertook a study of
energy consumption and the potential for conservation by
enterprises (Shen Longhai and Zhou Changyi, 1992). Efficiency
standards were set for a wide range of products, although they
currently serve as guidelines, not enforceable regulations.

Funds were allocated to energy efficiency projects, and
project implementation procedures were established. Projects are
administered by the Energy Conservation Company, part of the
State Energy Investment Corporation. The Energy Conservation
Company reviews projects, provides soft loans, tax exemptions,
and equipment, and solicits matching funds from local
governments.

China's conservation measures focused on industry, which
consumed almost 19.8 EJ in 1990. Measures were aimed specifically
at the chemical, iron and steel, and building materials
industries, each of which accounts for about 15 per cent of total
industrial energy use, and on widely used equipment such as
industrial boilers, fans, and pumps (Wang Qingyi, 1992). The main
measures adopted were equipment retrofit; elimination of
inefficient equipment; restrictions on wasteful and
environmentally harmful production methods; adoption of
efficiency standards; utilization of new energy conservation
materials and equipment, such as computers to monitor
consumption; waste recovery and utilization; and co-generation.

In fertilizer production, for example, significant energy
savings were achieved by installing new equipment, using a new
method to synthesize ammonia, and using electronic process
controls. Large savings were also achieved in the steel industry
through the adoption of various energy-efficient technologies and
co-generation. Boilers were also made cleaner and more efficient
through design changes; the use of co-generation, briquettes, and
control mechanisms; and the adoption of fluidized bed and dust
removal technology. Large efficiency gains can be made simply by
replacing equipment designed and/or made in the 1950s, 1960s, and
1970s with more recent designs. In many cases, the more advanced
designs already exist in China, but need to be popularized.

Energy planners in China are pushing for more reforms to
promote economic and energy efficiency and environmental
protection. Technical assistance can help China implement these
reforms by supporting Chinese energy experts and by promoting
joint ventures and foreign investment in energy efficiency
technologies and services. Assistance in energy efficiency will
improve the market for developed nation exports; reduce global
carbon emissions; minimize energy-related pollution in China; and
accelerate social progress and the development of a market
economy in China.

The efficiency potential in China must be viewed in terms of
how much future demand growth can be reduced. One major
study of this potential suggested that year 2025 demand could be
cut from a projected level of 75 EJ to 50 EJ (Sathaye and
Goldman, 1991).

3. Technology needs

Technological energy efficiency opportunities in the former
Soviet Union, Eastern Europe, and China include the use of
efficient electric motors; adjustable speed drives for electric
motors; automation of and greater use of sensors and controls in
industrial processes; advanced boiler controls; combined-cycle
power co-generation and other advanced power generation
technologies; more sophisticated and improved lighting and
refrigeration technologies; and thermal insulation and improved
windows in buildings. In the district heating and electric power
sector, transmission and distribution losses remain high, and new
combined-cycle technologies could eventually cut heat rates in
generating plants by 30 per cent or more. Major opportunities
also exist in the use of heat meters and thermostatic valves for
controlling radiators. More efficient trucks and automobiles are
a high priority as the transportation sector grows with
increasing income.

Recent developments in energy conversion technologies make
possible the cleaner and more efficient use of fossil fuels.
These same systems will reduce the cost of renewable energy to
competitive levels, thus permitting large reductions in fossil
and nuclear energy use over the coming decades (see Chandler,
1990; see also Johansson et al., 1993). These new technologies
rely on combined-cycle and gasturbine system generation of
electricity, usually coupled with the use of natural gas or the
gasification of coal or biomass. Using Soviet gas in the short
term and renewable resources in the longer term would enable the
regions to reduce both their economic and environmental costs.
Existing gas turbine systems could improve the thermal efficiency
of electricity generation from about 30 per cent in the region to
40-50 per cent (Chandler et al., 1990).

Gas turbines could also be used in the short term to take
advantage of coal-bed methane. Coal seams in Poland and the
former Czechoslovakia are very gassy - that is, they emit large
volumes of methane. Tapping this methane before the coal is mined
could produce up to 1 EJ (the equivalent of 500,000 barrels of
oil per day) in Poland and the former Czechoslovakia. Doing so
would make mines safer, reduce gas imports, and reduce emissions
of a powerful greenhouse gas to the atmosphere. The US government
is actively supporting exploitation of this resource in Eastern
Europe and China and, more recently, in Russia.³

In China, efforts to improve technology have been targeted
mainly on the industrial sector, which accounts for over
two-thirds of energy demand. Within this sector, the chief energy
consumers are the chemical industry, the iron and steel industry,
and the building materials industry. China encouraged the
adoption of energy-efficient technologies in these three
industries and pushed for the use of efficient boilers, fans, and
pumps in all industries. Technology upgrades were facilitated by
the establishment of over 200 provincial and local energy
efficiency centres. The centres are staffed by about 5,000
technical experts who provide energy audits, technical
assistance, and training.

These gains were relatively easy because of China's extremely
low efficiency rates, and there is still much room for
improvement. In 1988, China consumed at least three times more
energy for each unit of economic output than did Japan. Future
efficiency gains will be more difficult because they will depend
on improvements in management and technological efficiency, not
simply on economic restructuring.

4. Policy

Eastern Europe

Energy waste and inefficiency are so widespread that
opportunities for improving efficiency abound in nearly every
sector and for nearly every end use in Eastern Europe. The
limited availability of resources and, just as importantly, the
timing of major capital investments and the needs of economically
pressed citizens dictate a focused effort. Among the more
important considerations that should drive policy focus in Poland
are:

 What uses of energy are subject to radical change
as a result of economic restructuring, and what is the
probability that energy efficiency investments in those uses
will be stranded as a result of restructuring? What can be
done to reduce this probability?

 What large investments are being made, or will soon
be made, in equipment and structures that will significantly
affect Poland's energy consumption?

 Because the huge energy price increases that have
been imposed on Polish consumers are causing significant
hardship, what cost-effective, near-term measures are
available to reduce this hardship through improved energy
efficiency?

 Where is the market not working well in improving
energy efficiency, and what would make it work better?

On the basis of these considerations and others, and on the
basis of the particulars of the Polish energy economy, several
policy priorities emerge.

Among the more important is application of integrated
resources planning (IRP) in the electricity sector. IRP is a
flexible planning framework that fairly compares end-use
efficiency and load management resources (demand-side management
resources, or DSM) against a wide range of supply-side resources.
A plan produced through this process will recommend a path for
acquiring both supply- and demand-side investments to meet energy
needs at the lowest possible costs, considering the risks,
reliability, and environmental costs of the resources. Including
low-cost DSM resources typically results in large savings over
traditional utility planning methods.

A sound integrated resource plan, with a strong DSM component,
would help Poland guide the investment of a new US$1 billion
power sector loan being negotiated with the World Bank, and would
potentially save hundreds of millions of dollars. With the
assistance of the US Agency for International Development and the
government of Austria, Poland is now preparing such a plan
(RCG/Hagler Bailly, 1993).

Application of IRP in the heating sector also holds great
promise. As in the electricity sector, Poland's district heating
systems are facing large capital investments for repair and
upgrading. Before pouring huge sums of capital into systems that
have been sized to meet the load in poorly insulated and
controlled buildings, it is important to consider the
cost-effectiveness of improving these buildings to reduce the
heat load on the systems, and thereby take advantage of smaller
and less expensive system capacity requirements.

Providing consumers with access to capital is an important
policy option. Energy-efficiency loan funds can be created for
use by utilities and major industries through revenues from fuel
taxes or loans from multilateral development banks. Blocks of
financing could be channelled to utilities for distribution to
residential, commercial, and industrial consumers through DSM
programmes. In the industrial sector, loans could be made
available to enterprises for investments increasing energy
efficiency in addition to output or productivity. Experience has
shown that disbursing such loans requires technical assistance,
including:

Building domestic capability in the manufacture and
installation of energy-efficient equipment and materials is also
a high priority. East Europeans still depend heavily on
domestically produced equipment and materials, but unfortunately
these products typically have much lower energy performance than
do competing foreign-produced products. Because the foreign
products remain significantly more expensive than their
domestically produced counterparts (often two to four times more
expensive), potential energy savings from more efficient products
are usually forgone in favour of much lower purchase prices. The
result is a continuing flow of inefficient products into the
marketplace. The unfortunate trade-off between very high first
costs and energy efficiency need not continue. A concerted effort
to encourage the development of domestic capability for producing
energy-efficient products, which could take advantage of domestic
low-cost labour and materials, is an attractive option for
reducing energy consumption, supporting domestic industry, and
positioning domestic companies to compete better with foreign
producers.

An effective means of speeding development of domestic
production capability is to help domestic producers develop
markets for their products through "market-pull"
programmes that, through a variety of mechanisms, substantially
increase the market demand for their products. Market-pull
mechanisms might include voluntary efforts in which large
consumers and other interested parties offer financial incentives
to producers to help cover the development costs of new
energy-efficient products.

The Super-Efficient Refrigerator Program in the United States
is an example of this type of programme. Also known as a
"golden carrot" programme, this programme offered US$30
million in prize money to the winner of a competition among
refrigerator manufacturers to produce and sell a refrigerator
that consumed no more energy than 75 per cent of the level
allowed by the 1993 US refrigerator energy efficiency standard.
The programme was created by the Natural Resources Defense
Council, the US Environmental Protection Agency, and a group of
two dozen utilities. The prize money was provided by the
electricity utilities. The winner of the competition was the
Whirlpool Corporation, which proposed a refrigerator that uses no
CFCs, sacrifices nothing in service, and costs buyers no more
than standard models with comparable features (Treece, 1993).

An example of domestic capability building in energy
efficiency is already under development in the Polish lighting
products industry. The International Finance Corporation is
developing a project that is intended to help build the Polish
market for domestically produced compact fluorescent lamps. If
approved, the project will use funds from the Global
Environmental Facility of the World Bank to provide rebates to
Polish producers of these lamps. The rebates are targeted at
producers rather than consumers so that wholesale and retail
mark-ups are applied to a smaller base price, yielding a much
lower retail price than would be possible with a consumer rebate.
The very low price is expected to overcome the strong reluctance
among Polish consumers to purchase a lamp that now exceeds the
cost of an incandescent lamp by a factor of 20 to 30. Currently,
the only domestic producer of compact fluorescent lamps is
Philips Lighting Poland, a joint venture of Philips Lighting and
Polam Pila, a Polish producer.

Other domestic production capability programmes should be
considered for refrigerators, electric motors, variable-speed
electric motor drives, insulation, energy-efficient windows,
residential heating equipment, industrial boilers, energy
management systems, and other equipment and materials whose
domestic producers could make a substantial contribution to
domestic energy saving. Much of this capability building could be
achieved through the development of joint ventures with
non-domestic producers of energy-efficient equipment and
materials, but special efforts, such as targeted deal brokering,
are needed to speed the creation of the joint ventures.

Consumer information - in the form of appliance energy
efficiency labelling - helps overcome a major market failure. New
appliances can be labelled for energy efficiency so that buyers
can cut their future energy costs. The programme fits within a
philosophy of promoting market mechanisms because it promotes the
availability of impartial and credible information, a legitimate
activity of all forms of government. Most important
energy-consuming appliances made or sold in the United States
(including refrigerators, water heaters, furnaces, air
conditioners, and lighting) must carry labels advising buyers on
the energy cost of their operation as well as to meet standards
for maximum rates of energy consumption. The European Community,
led by Denmark, is actively considering energy efficiency label
requirements. Some highly efficient lighting products marketed in
Europe already bear annual energy-cost labels. Labelling would
help push manufacturers to produce competitive products, and
ensure that inefficient products are not "dumped" on
the region by foreign exporters.

Of less importance now, but of enormous importance within the
next 10 years, are policies to promote energy efficiency in the
transportation sector. The countries of Eastern Europe have
levels of public transit ridership that most Western countries
can only dream about. More than 80 per cent of workers in Prague
and Warsaw commute to work by public transportation. These
passenger levels are at risk though. Rising incomes and the ease,
flexibility, and convenience of commuting by car are pulling
people out of public transportation and into cars. Warsaw and
Budapest are already experiencing large traffic jams. Warsaw's
city centre sidewalks are jammed with cars that make walking
difficult. Financially pressed public transit systems, whose fare
increases have been tightly controlled, have had difficulty
maintaining their level of service. Warsaw's public transit
system is so hard pressed that it could not pay its electricity
bill for six months in 1991. Should the trend continue, large
East European cities could find themselves in the same
predicament as their Western counterparts: rapidly growing
suburban, low-density sprawl, falling transit ridership,
traffic-caused heavy congestion and pollution, and huge
transportation and land-use commitments to the automobile. East
European nations need to take advantage of their low dependence
on the automobile by working to keep public transportation
efficient, convenient, and attractive. Keeping riders on public
transportation is a far less daunting task than persuading
drivers to abandon their vehicles and choose public
transportation.

The former Soviet Union

Energy price decontrol in the former Soviet Union is under
way. However, privatization and restructuring will take longer.
These efforts have not worked well in Eastern Europe, and the new
nations formed from the Soviet Union would do well to take this
process in manageable steps. The key issue is competition, and
competition can be engendered among state-owned enterprises
during the transition to private property. The utility sector
will require regulation because for the foreseeable future the
supply of thermal and electric energy by utilities will remain
monopolistic.

Western nations can aid the difficult transition for the new
nations of the former Soviet Union in many ways. Macroeconomic
assistance is vital; but so is microeconomic assistance. That is,
the former Soviet Union will need help in financing energy
efficiency measures, particularly the installation of new, highly
efficient gas turbines for power generation. Billions in loan
guarantees, with the promise of technical cooperation from the
private sector, would probably be necessary to make this happen.

In the utility sector, integrated resources planning is a high
priority (see Vine and Crawley, 1991). Low-cost exchanges of
experts would help transfer this experience. Placing half a dozen
foreign IRP specialists in utilities and bringing a similar
number of former Soviets to the West would best facilitate this
process. Demonstrations could be developed in IRP for a few tens
of millions of dollars, and would have the effect, in the long
run, of saving billions.

IRP could also be used to great effect in the district heating
sector, where large, cost-effective demand-side resources should
be allowed to compete against supply-side resources for new
investments. Much of this demand-side resource can be developed
with relatively low-technology measures.

The Russian Federation Ministry of Fuels and Energy and the
Ministry of Sciences have articulated principles and mechanisms
of government policy in energy efficiency. The main directions
they recommend for improving energy efficiency are:

 developing basic energy efficiency legislation,
including incentives for investment and standards for
energy-consuming equipment; and

 developing a favourable economic environment,
including soft credits for efficiency investments and the
creation of a regional loan fund (funded by a 1 per cent
value-added tax on energy).

This programme is not particularly aggressive, and, in
projections made by a policy group, energy intensity of the
economy would not decline beyond the 1990 level even by the end
of the century.

China

Despite the rapid expansion of energy production since 1978,
per capita commercial energy consumption remains low. The
combination of low per capita energy use, inefficient
technologies, and an inefficient management system results in a
low level of energy services. Chinese energy planners are pushing
ahead with a variety of reforms in order to raise the level of
energy services while minimizing environmental damage. Priorities
include:

- increased importation of efficiency and environmental
technologies and services;
- continuation of the break-up of monopoly energy
corporations;
- elevation of energy prices to cover production costs and
discourage inefficiency;
- elimination of subsidies to money-losing state energy
enterprises; and
- integration of conservation and energy supply investment
planning, functions that are currently carried out by
separate government agencies.

Fundamental changes in China's economic system have already
laid the groundwork for these reforms and have been responsible
for rapid growth in the economy and in energy use. Since 1978,
China has taken great strides away from central planning toward
what Party Secretary Jiang Zemin calls a "socialist market
economy." State ownership is on the decline as unprofitable
state enterprises lose their subsidies and make way for new
ventures in the booming non-state sector.

Reform has come later and slower to the energy sector, but
appears to be gaining momentum. Energy price reform, ownership
changes, and energy efficiency policies are the essential
elements of China's attempt to bridge the gap between energy
supply and demand.

China's pricing system has been transformed by the
introduction of markets, decentralization, and price adjustments.
China has created a "two-tier" pricing system as a step
on the path to free markets. Under this system, the government
gives state enterprises an incentive to increase production by
allowing them to sell above-plan output at market prices. It has
been estimated that in 1989, on average, 38 per cent of a state
enterprise's outputs were sold on the market, and 56 per cent of
its inputs were procured on the market (McMillan and Naughton,
1992).

Price reform is sorely needed in the energy sector because
prices are too low to cover the cost of production. Irrational
pricing has resulted in massive debt. The cumulative debt owed by
public coal mines and utilities amounts to 100 billion yuan, and
there is no way to pay off the debts within the existing
management system (Zhou Dadi, 1992).

In the case of energy products, the pricing system has more
than two tiers. For example, there are three crude oil prices in
China: the low plan price, the high plan price, and the
international market price. The low plan price for oil tripled in
1993, from around US$5 a barrel to US$16.30 a barrel. This price
hike brings about two-thirds of China's oil closer to the
international price, which is around US$21 a barrel. In addition
to raising the low plan price, administrators have also decided
that much of the oil formerly assigned to the low-price category
will now be sold at the high plan price. The high plan price is
actually higher than the international price now because of
transportation bottlenecks (Goldstein, 1992). Coal prices have
also risen significantly in the 1990s and may soon be
deregulated.

Electricity prices are also affected by a variety of market
and regulatory mechanisms. Prices are regulated for
state-operated power plants and cost based for plants operated by
investors, which may be local government, users, or semi-private
corporations. The state plants still sell electricity at a
relatively low plan price, although the price has been raised
somewhat owing mostly to the rising cost of fuel. Non-state
plants set prices by calculating interest and profit from the
capital investment and operation costs. The price paid by the
consumer is often much higher than the price set by the
generator, however, because governments at the provincial,
municipal, and county level may impose fees to raise funds for
electricity development. In addition, all plants are allowed to
sell electricity at a higher price if they exceed the planned
target.

The shift from planned to market prices has been matched by a
shift away from ownership by the central government. Ownership
changes have been accomplished through collectivization of state
enterprises and the growth of the non-state sector. The non-state
sector has grown at an annual rate of 17.6 per cent. Some
analysts claim that the non-state sector employed as much as 82
per cent of the total labour force and produced 64 per cent of
China's GNP in 1990. Its share of total industrial output
expanded from 22 per cent in 1978 to 45 per cent in 1990 (Chen
Kang, 1992).

Energy conservation measures were financed through China's
policy of replacing oil with coal for domestic use. Instituted at
a time when international oil prices were high, this policy
allowed China to use hard currency from oil exports to purchase
foreign technology that was more energy efficient and to build
more coal-fired power plants. The policy may soon be phased out,
however, for both economic and environmental reasons. It has been
undermined by the drop in oil prices, as well as by the
recognition of coal's contribution to air pollution and global
warming (Christoffersen, 1992).

If the coal-for-oil policy is abandoned, China will have to
find other sources of funding for energy efficiency. One obvious
method is for the central government to take funds that are
currently designated for expanding supply and reallocate them to
conservation. This is not likely to occur, however, until the
government adopts a planning method that integrates supply and
demand. Meanwhile, the central government has shifted the burden
of increasing efficiency to enterprises and local governments.
Yet these organizations will have little incentive to invest in
efficiency without price reform - that is, the removal of all
subsidies for energy prices.

Facilitating joint ventures in energy efficiency
simultaneously helps developed nations, firms and promotes
economic development and environmental protection in China. Those
who are sceptical of the profitability of trade and investment in
China might note that Hong Kong, Taiwan, Japan, and South Korea
have already taken the lead in profiting from China's booming
economy.

The developed nations can promote joint ventures through
business information exchange and demonstration projects, and
legislative support for energy efficiency policies in China.
Information exchange helps foreign companies understand the
Chinese market how to do business, with whom they can
collaborate, where siting their operations makes sense, how to
conduct banking, how to get their money out of the country. One
example of information exchange that has already been funded is
the US Department of Energy's electric power mission to three
major Chinese cities in June 1993. US participants represented
independent power producers, regulated utilities, architectural
and engineering firms, and equipment manufacturers. They met with
Chinese counterparts to discuss opportunities for cooperation.

Facilitating demonstration projects in areas of foreign
expertise is another good way to promote joint ventures. The US
Environmental Protection Agency, for example, worked with China's
Ministry of Energy to get World Bank Global Environmental
Facility funding for a coal-bed methane demonstration project.

Technical assistance can also promote joint ventures through
legislative and regulatory support for energy efficiency policies
in China. Foreign firms cannot market their practices and
technologies until the institutional and legal infrastructure in
each country has been put in place. By helping Chinese experts
promote IRP as a national policy, the West can increase demand
for compact fluorescent light bulbs, metering systems, renewable
energy assessments, and building efficiency technologies.

Energy policy must balance supply and demand measures to
provide energy services for economic development while protecting
consumers and the natural environment. A sustainable energy
policy will promote economic development by:

- increasing industrial competitiveness by reducing net
production costs;
- reducing net capital requirements by avoiding the need for
new mines and power plants;
- improving overall productivity by promoting new
technologies to increase labour and capital productivity
while saving energy.

Such a policy would help consumers cope with rising energy
prices by saving money through conservation. This strategy
requires measures to overcome market failures, including: lack of
information; split incentives; natural monopolies; and lack of
capital due to the economic mismanagement of the former communist
system.

Technology transfer will not proceed in any of the three
regions without fundamental policy reform. Any rational energy
policy must be based on market mechanisms, with limited
intervention to regulate monopolies and overcome market failures.
The basic mechanisms of a market-based strategy should include:

 market pricing of energy supplies;

 energy supply sector restructuring;

 privatization and re-regulation of transmission and
distribution networks for electricity, gas, and heat supply
enterprises;

 privatization of energy suppliers.

5. Conclusion

Technology transfer in the regions of the former Soviet Union,
Eastern Europe, and China cannot be achieved without significant
new efforts in the energy sector. Past energy policy has
seriously harmed the region's economic and environmental health
by encouraging the development of expensive, polluting supply
alternatives for providing energy services. The establishment of
market prices and freer markets should be the top energy policy
priority for these countries, but adequate time should be allowed
for their economies to adapt to these measures, and it should be
recognized that market measures alone will not fully exploit the
vast energy efficiency resources that exist. Among other policies
and programmes that are needed to tap these resources, new models
of technology transfer that aggressively promote both production
and demand for new technologies are needed. By reorienting their
policies to deliver cost-effective energy services through
demand-side measures and, early in the next century, new
renewable energy supply systems, the regions could achieve a
healthier, more prosperous future. This strategy implies:

 to the extent possible, satisfying new energy
demand in the medium term with natural gas; and

 developing renewable energy supplies over the long
term.

The first element requires energy resources be priced to
reflect both their replacement costs and their environmental
impacts. The second element requires study and adaptation of the
experience gained by other countries in exploiting energy
efficiency resources. The third element requires careful
development and use of natural gas resources in a way that will
permit an easy transition to renewable energy carriers. And the
fourth element must rely on a combination of Western research
efforts and local measures for encouraging the market penetration
of new energy sources.

Notes

1. US GDP fell from about US$1 trillion to US$0.75 trillion
(1958 dollars) between 1930 and 1934.

2. Russian electricity consumption in 1990 totalled 7,031 kWh
per capita, compared with about 10,600 kWh per capita in the
United States.

3. Major reports on the potential for developing coal-bed
methane have been sponsored by the US Environmental Protection
Agency. See Bibler et al. (1992).